Today, both large and small investors can invest in a start-up and enjoy the financial rewards that come with getting in on the ground floor of a new company. You may have a specific type of start-up in mind or specific goals for which you wish to aim. But regardless of your budget, new enterprises ranging from high-tech projects to Lincoln casino gambling entertainment offer you the chance to increase your funds through careful financial decisions.
Start-Ups
Start ups are companies that are in the initial stages of business. They get their initial funding through outside investment from family and friends, venture capitalist investors and crowdfunding efforts which helps them get off the ground.
There are start-ups in almost every type of industry but most are centered in the high-tech, delivery services, healthcare tech, AI, VR, educational technology, financial tech and Big Data industries.
These days, savvy investors diversify their investments and many are putting significant percentages of their resources in start ups. Even though an investment in a start-up can be a risky financial venture, the potential rewards are significant. Some of the reasons that investors like to invest in start-ups include:
- You can get in on the ground floor meaning that there’s lower overhead capital requirement and potentially high rewards of an exit strategy.
- You can diversity your portfolio and spread your investments into different asset categories which reduces your financial risks.
- Start-up investments are less prone to the financial risks of market fluctuations.
- You can invest in startups that fit your funding capitals and personal goals – medicine, tech, agriculture, etc.
- Investing in a start-up helps to build the economy, build new technology and power innovations.
If you’re considering investing in a start-up you should also be aware of potential problems that these investments carry with them. For instance, you can’t trade start-up investments – you have to wait for the start-up to be acquired, go public or be bought out in order to cash out the investment.
Best Practices
What are some of the things that you should remember when you invest in a start-up?
- Investigate the Industry and Market Conditions. This information will tell you in which industries it’s wise to invest and what the needs are of the public that the start-up will be meeting.
- Consider your own background and experience. If you’re in the medical field, for instance, you might have insights into medical technology startups that will help you make better decisions regarding which start-ups to invest in.
- Do your research. Study the financial records of the company in which you want to invest so that you have a good idea of the company’s financial health and how much it would realistically take for the company to push forward.
- Diversify your investments among startups that are from different markets, ages and industries. This diversification helps you maximize potential returns and mitigate the risk of financial loss.
- Stay involved in the company. Monitor the start-up’s financial health, volunteer to serve on the board, mentor the leadership and get involved in other activities that will assist the company to succeed.
Crowdfunding
If you want to invest in start-ups, you can identify the start-up(s) with which you want to invest through a crowdfunding site. A crowdfunding site is a startup investing platform that offers a curated selection of companies so you can find a company with which you wish to invest.
Some of the biggest crowdfunding sites include Kickfinder, Wefinder, Seedinvest, Republic and StartEngine. The Crowdfunding sites are selective about the start-ups that they list – Kendrick Nguyen, CEO of the Republic crowdfunding platform, said “Thousands of companies apply to raise on our platform each year, and we approve only about 3% of them.
There are varying minimum buy-ins to invest in companies listed on these platforms – you can get started in investing with as little as $100 through many of the platforms, for instance, SeedInvest requires a minimum $500 buy-in.
Via crowdfunding sites, companies can access alternative funds for new projects, ideas or businesses. Crowdfunding sites also give companies the chance to access new customers and gain useful market insights by enabling collaboration and cultivation of a community around the offering.
The crowdfunding platform collects investments from investors and charges the fund-raisers a fee for the service if the fundraising campaign has been successful. Many crowdfunding platforms are all-or-nothing, meaning that if the company reaches its target, they collect the money but if they don’t, all investors receive their money back.
Types of Crowdfunding
There are several different types of crowdfunding, all of which are supported on crowdfunding sites. The various types include:
- Peer-to-peer lending – this type of lending is similar to taking out a loan from a bank but with peer-to-peer lending, the borrower is borrowing from multiple investors. The money is lent with the understanding that it will be paid back with interest.
- Equity crowdfunding – investors buy stakes in the business, similar to traditional stock investments
- Rewards-based crowdfunding – the initial investment is repaid in the form of goods and services
- Donation-based crowdfunding – donations fund charitable projects with the donors having no expectations of financial or material return
- Profit/revenue-sharing – investors invest at the outset with the understanding that they will share in the profits down the line
- Debt-securities crowdfunding – investments are in the form of debt securities (i.e. bonds) issued by the company
- Hybrid models — elements of different crowdfunding models are combined.
Deciding
Even if you’re investing just a small amount of money, you want to make your investment wisely. Some things to consider before investing in a start-up include:
- Are the founders knowledgeable about the product/service and the market to which they wish to market? If the company seems like it’s learning as it moves forward, they are probably not ready to have you invest your money in its product or service.
- Are you knowledgeable about the product/service and the market to which the company is marketing? The more you know about the product/service, the better you’ll be able to assess whether this is a good investment.
- Are the founders passionate about their product/service? The more invested they are in their product or service, the harder they’ll be working to move it forward.
- How big is the market for the product or service? The smaller the niche, the less revenue the company will see and the fewer your profits as an investor.
